As a recently hired accountant for a small business, SMC, Inc., you are provided with last year s balance sheet, income statement, and post closing trial balance to familiarize yourself with the business.
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SMC, Inc. Balance Sheet |
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ASSET |
31 Dec 02 |
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Cash |
$34,500 |
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Accounts receivable. |
25,000 |
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Inventory |
10,000 |
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Supplies |
200 |
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Total assets |
$69,700 |
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Liabilities and Stockholders Equity |
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Liabilities: |
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Accounts payable |
$12,000 |
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Salaries payable |
1,000 |
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Income taxes payable |
3,675 |
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Total liabilities |
$16,675 |
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Stockholders equity: |
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Capital stock (10,000 shares outstanding) |
$25,000 |
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Retained earnings. |
28,025 |
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Total stockholders equity |
53,025 |
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Total liabilities and stockholders equity. |
$69,700 |
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SMC, Inc. Income Statement For the Year Ended December 31, 2002 |
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Sales revenue |
110,000 |
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Rent revenue |
1,000 |
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Total revenues. |
$111,000 |
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Less cost of goods sold |
60,000 |
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Gross margin |
$51,000 |
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Less operating expenses: |
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Supplies expense |
400 |
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Salaries expense. |
22,000 |
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Miscellaneous expense |
4,100 |
26,500 |
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Income before taxes |
$24,500 |
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Less income taxes. |
3,675 |
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Net income |
20,825 |
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Earnings per share ($20,825 10,000 shares) |
$2.08 |
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SMC, Inc. Post Closing Trial Balance 37,621 |
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Debits |
Credits |
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Cash |
34,500 |
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Accounts Receivable |
25,000 |
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Inventory |
10,000 |
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Supplies |
200 |
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Accounts Payable |
$12,000 |
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Salaries Payable |
1,000 |
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Income Taxes |
3,675 |
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Capital Stock |
25,000 |
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Retained Earnings |
28,025 |
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Totals |
$69,700 |
$69,700 |
You are also given the following information that summarizes the business activity for the current year, 2003.
a. Issued 5,000 additional shares of capital stock for $10,000 cash.
b. Borrowed $5,000 on January 2, 2003, from Downtown Bank as a long term loan. Interest for the year is $500, payable on January 2, 2004.
c. Paid $3,600 cash on November 1 to lease a truck for one year.
d. Received $1,200 on November 1 from a tenant for six months rent.
e. Paid $600 on October 1 for a one year insurance policy.
f. Purchased $500 of supplies for cash.
g. Purchased inventory for $100,000 on account.
h. Sold inventory for $150,000 on account; cost of the merchandise sold was $80,000.
i. Collected $120,000 cash from customers accounts receivable.
j. Paid $70,000 cash for inventories purchased during the year.
k. Paid $25,000 for sales reps salaries, including $1,000 owed at the beginning of 2003.
l. No dividends were paid during the year.
m. The income taxes payable for the year were paid. Income taxes are based on a 15% corporate tax rate.
n. For adjusting entries, all prepaid expenses are initially recorded as assets, and all unearned revenues are initially recorded as liabilities.
o. At year end, $150 worth of supplies are on hand.
p. At year end, an additional $5,000 of sales salaries are owed, but have not yet been paid.
You are asked to do the following:
1. Journalize the transactions for the current year, 2003, using the accounts listed on the financial statements and other appropriate accounts (you may omit explanations).
2. Set up T accounts and enter the beginning balances from the December 31, 2002, postclosing trial balance for SMC. Post all current year journal entries to the T accounts.
3. Journalize and post any necessary adjusting entries at the end of 2003. (Hint: Items b, c,
d, e, m, o, and p require adjustment.)
4. After the adjusting entries are posted, prepare a trial balance, a balance sheet, and an income statement for 2003. (Hint: Income before income taxes should equal $39,600.)
5. Journalize and post closing entries for 2003 and prepare a post closing trial balance.
6. Using the DuPont framework, compute the return on equity for SMC for 2002 and 2003.
7. Interpretive Question: What is your overall assessment of the financial health of SMC, Inc.?